Are Visagar Polytex Limited's (NSE:VIVIDHA) Interest Costs Too High?

While small-cap stocks, such as Visagar Polytex Limited (NSEI:VIVIDHA) with its market cap of IN₨312.67M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into VIVIDHA here.

How does VIVIDHA’s operating cash flow stack up against its debt?

Over the past year, VIVIDHA has reduced its debt from IN₨121.25M to IN₨111.95M – this includes both the current and long-term debt. With this debt payback, VIVIDHA currently has IN₨3.21M remaining in cash and short-term investments , ready to deploy into the business. On top of this, VIVIDHA has generated cash from operations of IN₨1.75M during the same period of time, resulting in an operating cash to total debt ratio of 1.56%, indicating that VIVIDHA’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VIVIDHA’s case, it is able to generate 0.016x cash from its debt capital.

Can VIVIDHA meet its short-term obligations with the cash in hand?

Looking at VIVIDHA’s most recent IN₨230.18M liabilities, it appears that the company has been able to meet these commitments with a current assets level of IN₨439.36M, leading to a 1.91x current account ratio. Usually, for Luxury companies, this is a suitable ratio as there's enough of a cash buffer without holding too capital in low return investments.

Is VIVIDHA’s debt level acceptable?

With a debt-to-equity ratio of 38.99%, VIVIDHA's debt level may be seen as prudent. This range is considered safe as VIVIDHA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if VIVIDHA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For VIVIDHA, the ratio of 2.23x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

Although VIVIDHA’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how VIVIDHA has been performing in the past. I recommend you continue to research Visagar Polytex to get a better picture of the stock by looking at:

• 1. Valuation: What is VIVIDHA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether VIVIDHA is currently mispriced by the market.
• 2. Historical Performance: What has VIVIDHA's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.